Year End Tax Planning & 2018 Tax Law Changes
As the end of the year approaches, it is a good time to think of planning moves that will help lower your tax bill for this year and possibly the next. Year-end planning for 2018 takes place against the backdrop of new laws that make major changes in the tax rules for individuals and businesses.
For individuals, there are new lower income tax rates, a substantially increased standard deduction, severely limited itemized deductions and no personal exemptions, an increased child tax credit, and a watered-down alternative minimum tax (AMT), among many other changes. Please see the enclosure for more detail on the new law changes.
For businesses, the corporate tax rate is cut to 21%, the corporate AMT is gone, there are new limits on business interest deductions, and significantly liberalized expensing and depreciation rules. And there's a new deduction for non-corporate taxpayers with qualified business income from pass-through entities (including actively participating s-corporations, partnerships, sole proprietorship, rental activities).
Despite this atmosphere of change, the time-tested approach of deferring income and accelerating deductions to minimize taxes still works for many taxpayers. If you would like us to narrow down the specific actions that you can take, we would gladly meet with you to tailor a particular plan.
Year-End Tax Planning Moves for Individuals
Higher-income earners must be wary of the 3.8% surtax on certain unearned income (i.e. interest, dividends, capital gains, other passive activities). This surtax is levied on taxpayers with modified adjusted gross income (MAGI) above $200,000 for singles, $250,000 married filing jointly, and $125,000 married filing separately. Some taxpayers should consider ways to minimize additional unearned income, try to see if they can reduce MAGI; or consider ways to minimize both.
Postpone income until 2019 and accelerate deductions into 2018 if doing so will enable you to claim larger deductions, credits, and other tax breaks for 2018 that are phased out over varying levels of adjusted gross income. These include deductible IRA contributions, child tax credits, higher education tax credits, and deductions for student loan interest. Postponing income also is desirable for those taxpayers who anticipate being in a lower tax bracket next year due to changed financial circumstances.
Long-term capital gains from sale of assets held for over one year are taxed at 0%, 15% or 20% depending on your taxable income. (0% rate applies for taxable income up to $77,200 MFJ; $38,600 S; $51,700 HofH). Those in the 0% bracket may want to sell stock with gains to take advantage of the 0% tax rate.
It may be advantageous to try to arrange with your employer to defer, until early 2019, a bonus that may be coming your way. This could cut as well as defer your tax.
Thinking about a Roth IRA? You may want to consider converting your traditional-IRA money invested in beaten-down stocks (or mutual funds) into a Roth IRA in 2018 if eligible to do so. Keep in mind the conversion will increase your AGI for 2018, and possibly reduce tax breaks geared to AGI. This should be discussed with your tax advisor.
If over age 70 ½ take the required minimum distributions (RMDs) from your IRA or 401(k) plan (or other employer-sponsored retirement plan). RMDs from IRAs must begin by April 1 of the year following the year you reach age 70-½. Failure to take a required withdrawal can result in a penalty of 50% of the amount of the RMD not withdrawn. Thus, if you turn age 70-½ in 2018, you can delay the first required distribution to 2019, but if you do, you will have to take a double distribution in 2019-the amount required for 2018 plus the amount required for 2019. The tax impact should be discussed with your tax advisor.
If you are age 70-½ or older by the end of 2018, have traditional IRAs, and particularly if you can't itemize your deductions, consider making 2018 charitable donations via qualified charitable distributions from your IRAs. Such distributions are made directly to charities from your IRAs, and the amount of the contribution is neither included in your gross income nor deductible on Schedule A, Form 1040. But the amount of the qualified charitable distribution reduces the amount of your required minimum distribution, which can result in tax savings.
Consider using a credit card to pay deductible expenses (i.e. charitable donations, business expenses) before the end of the year. Doing so will increase your 2018 deductions even if you don’t pay your credit card bill until after the end of the year.
Consider increasing the amount you set aside for next year in your employer's health flexible spending account (FSA) if you set aside too little for this year.
If you become eligible in December of 2018 to make health savings account (HSA) contributions, you can make a full year's worth of deductible HSA contributions for 2018.
Year-End Tax-Planning Moves for Businesses & Business Owners
For tax years beginning after 2017, taxpayers other than corporations may be entitled to a deduction of up to 20% of their qualified business income. For 2018, if taxable income exceeds $315,000 for a married couple filing jointly, or $157,500 for all other taxpayers, the deduction may be limited based on whether the taxpayer is engaged in a service-type trade or business (such as law, accounting, health, or consulting), the amount of W-2 wages paid by the trade or business, and/or the unadjusted basis of qualified property. The limitations are phased in for joint filers with taxable income between $315,000-$415,000, and for all other taxpayers between $157,500-$207,500.
Taxpayers may be able to achieve significant savings by deferring income or accelerating deductions so as to come under the dollar thresholds for 2018. Depending on their business model, taxpayers also may be able to increase the new deduction by increasing W-2 wages before year-end. The rules are quite complex, so don’t make a move without consulting your tax advisor.
Businesses also can claim a 100% bonus first year depreciation deduction for machinery and equipment if purchased and placed in service this year. The 100% bonus first-year write-off is available even if the qualifying assets are in service for only a few days in 2018.
These are just some of the year-end steps that can be taken to save taxes. If you are interested in our tax planning services, feel free to contact us for an appointment.
David B. Alexander
2018 Tax Law Changes
The Tax Cuts and Jobs Act of 2017 (TCJA) is the largest tax overhaul since the 1986 Tax Reform Act and it will affect almost every individual and business in the United States. The new laws went into effect in January of 2018, with many of the provisions relating to individuals expiring at the end of 2025.
The following is a brief overview of TCJA's key changes affecting individuals.
Tax Rates and Brackets. TCJA provides seven tax brackets, with most rates being two to three points lower than the ones under old law (the top rate goes from 39.6 percent to 37 percent). The top rate kicks in at $600,000 of taxable income for joint filers ($300,000 MFS and $400,000 for all other individual taxpayers).
Personal/Dependent Exemptions and Child Tax Credit. TCJA repeals the personal and dependent exemption deduction. To compensate, the child tax credit increases to $2,000 ($1,400 is refundable), up from $1,000 under old law. The modified adjusted gross income threshold where the credit phases out is $400,000 for joint filers and $200,000 for all others. The maximum age for a child eligible for the credit remains 16. TCJA also provides a $500 nonrefundable tax credit for dependent children over age 16 and all other dependents. Most families with non-child dependents will lose some ground here, as the $500 credit will generally be less valuable than the $4,150 exemption deduction it replaces.
Standard Deduction/Itemized Deductions (Schedule A). The standard deduction nearly doubles to $24,000 for joint filers and surviving spouses ($18,000 for HOH and $12,000 for MFS/SINGLE). Therefore, many taxpayers who claimed itemized deductions in the past will no longer be able to do so as many itemized deductions have been cut back or abolished, as detailed below.
Deduction for State and Local Taxes (SALT). TCJA imposes a $10,000 limiton the deduction for state and local taxes, which includes both property taxes and income taxes (or sales taxes in lieu of income taxes) and repeals the deduction for foreign property taxes. There was no limit on the amount of the SALT deduction under old law.
Mortgage Interest Deduction. TJCA reduces to $750,000 (from $1 million) the limit on the loan amount for which a mortgage interest deduction can be claimed by individuals, with existing loans grandfathered. TCJA also repeals the deduction for interest on home equity loans.
Deduction for Medical Expenses. TCJA enhances the deduction for 2018 by lowering the adjusted gross income (AGI) floor for claiming the deduction from 10 percent to 7.5 percent for all taxpayers.
Deduction for Casualty and Theft Losses. TCJA repeals the deduction for casualty and theft losses, except for losses incurred in presidentially declared disaster areas.
Deduction for Charitable Contributions. TCJA retains the charitable contribution deduction and increases the maximum contribution percentage limit from 50 percent of a taxpayer's contribution base to 60 percent for cash contributions to public charities.
Deduction for Certain Miscellaneous Expenses. TCJA repeals the deduction for miscellaneous itemized deductions subject to 2-percent of AGI floor. This includes employee business expense deduction, union dues, investment/advisory fees and other miscellaneous expenses.
*Some taxpayers may be able to work around the new reality by applying a “bunching strategy” to pull or push discretionary medical expenses and charitable contributions into the year where they will do some tax good. For example, if a taxpayer knows he or she will be able to itemize deductions this year but not next year, the taxpayer will benefit by making two years’ worth of charitable contributions this year, instead of spreading out donations over 2018 and 2019.
Passthrough Tax Break. TCJA creates a new 20 percent deduction for qualified business income from sole proprietorships, S corporations, partnerships, and LLCs taxed as partnerships. The deduction is claimed by individuals on their personal tax returns as a reduction to taxable income. The new tax break is subject to some complicated restrictions and limitations that apply to individuals with taxable income at or below $157,500 ($315,000 for joint filers).
Repeal of Alimony Deduction. TCJA repeals the deduction for alimony paid and also the corresponding inclusion in income by the recipient, effective for tax years beginning in 2019. Alimony paid under separation agreements entered into prior to 2019 will generally be grandfathered under the old rules.
Education-Related Tax Breaks Preserved. TCJA retains deductions for student loan interest and educator expenses.
Alternative Minimum Tax. TCJA increases alternative minimum tax (AMT) exemption amounts by 27 percent, and sharply increases the income level where the exemption is phased out. Combined with the effects of other changes, many individuals who were subject to AMT in 2017, will not be in 2018 and beyond.
Expanded Uses for 529 Plan Distributions. TCJA allows up to $10,000 in aggregate 529 distributions per year to be used for elementary and secondary school tuition. Under old law, 529 distributions could only be used for higher education expenses.
Repeal of Individual Healthcare Mandate. TCJA repeals the tax penalty on individuals who fail to carry health insurance. However, this does not go into effect until year 2019. Therefore, we will still need proof of healthcare insurance for year 2018 tax returns.
Estate and Gift Tax Exclusion. TCJA permanently doubles the basic exclusion amount for estate and gift tax purposes from $5.6 to $11.2 million. The annual gift tax exclusion is $15,000 for year 2018.
As you can see, the provisions of TCJA are quite extensive and complicated. If you have any questions, please call our office at your earliest convenience so we can discuss how these changes will impact you and/or your business.